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Data Visualization: The Key to Communication in CRE Deals

On this blog, we’ve discussed before how traditional commercial real estate (CRE) modelling activities demand an enormous amount of skilled time to execute. On average, the technical contraction makes up only half of the effort. The other half is design and presentation. We’ve also discussed how much of this time expenditure can be eliminated through automation, the cloud, and software features like the easy-to-use graphical interfaces pioneered by CRM tools.

While these features can help firms generate modeling results faster and easier, the results may not achieve their full value if they can’t be communicated effectively–in some cases they could be misunderstood or ignored. CRE deals are complicated, and traditional tools are often cumbersome. As a result, communicating what a model actually means can be tough, and more than a few good deals have died due to ineffective communication.

Part of the struggle is that CRE deals usually involve a wide range of stakeholders from highly trained technical personnel like underwriters to more general audiences like corporate decision-makers, clients, and investors, all looking for a different level of detail and focus. To get the right information across in an easily consumable way to this wide range of stakeholders, firms must have access to tools that allow them to generate visualizations of financial data tailored to specific audiences, quickly and easily.

Making everyone happy

For most firms today using traditional modelling techniques built on Excel or enterprise software, creating charts and graphs to represent financial models can add hours of work to a model. Software like Excel offers extremely powerful features for generating graphs and charts, but the process is very manual and time consuming. The level of granularity offered by spreadsheet software often makes these tools impractical when you need to generate graphics to illustrate an executive summary, an investor outlook, or information for clients and partners, all on tight deadlines–and on top of the many hours needed to run and audit the model in the first place.

Self-service analytics solutions should, in theory, make this process much easier, but these tools are often somewhat difficulty to master as well. Add to this the fact that it’s not always the case that people who are brilliant analysts are equally brilliant communicators, and you consequently have many firms hiring special teams of designers who are dedicated to churning out graphics representations of complicated models.

In practice, the difficulty of generating visuals tailored to specific audiences means that the significance behind a model can get lost in translation for one or more key audience. In addition,  satisfying everyone’s needs for the information that will help them make the right decision is often an iterative process. You’re not only generating this array of visuals once, you might be generating them in multiple rounds as adjustments are made to the model and outputs change, a process that be error-prone when done manually.

Making everyone happy and delivering the right information requires yet another rethinking of how traditional modeling is done, and another look in to what ideas can be borrowed from other industries.

Putting complexity under the hood

The time consuming and cumbersome activities of generating visuals in Excel and other traditional modelling tools can easily be replaced with sleeker and more effective methods when CRE modelling data is unified and managed through a single system that puts an easy-to-use, feature-rich interface on top of the complexities of data.

In fact, this is where CRM-style tools and user interfaces can really shine. With complexity sequestered under the hood, it’s much easier to build tools that make generating visuals easy. And when it’s easy to generate charts and graphs, it’s easier to focus on generating the right charts and graphs for every stakeholder, at every stage of the deal.

What It Takes to Analyze one of the World’s Largest Commercial Real Estate Deals

In case you haven’t heard, one of the biggest CRE projects in history is currently underway in New York, with plans to create decking over approximately 180 acres of some of the busiest rail facilities in the country, serving Amtrak, New Jersey Transit and the Long Island Rail Road. According to the Sunnyside Yard Feasibility Study, this project can bring a host of improvements to Queens, NY, including better transportation, jobs, parks, schools, libraries, housing and community centers.

The project will involve creating 14,000-24,000 housing units, 31-52 acres of open space, new schools, community facilities and retail amenities, costing somewhere between $16 and $19 billion to build out. Noting that “A project of this scale would span several political administrations, multiple economic cycles, and changes to the City’s employment base,” the feasibility study established a series of planning guidelines based on engineering, urban design, and financial constraints to inform future analysis and decision-making.

There’s a high degree of complexity to any commercial real estate valuation. For a transaction between a buyer and seller to occur, all participants in the value chain must understand the risks associated with a commercial real estate asset or portfolio, and this diverse group of stakeholders can be very large, with exacting requirements and differing opinions. Given all these variables, what will it take to perform the calculations on the largest single development project in NYC history?


Multivariate analysis on historical and real-time data

In anticipating what might be required of this project on the valuation side, you have to think about the number of factors that could affect various calculations…the number of input variables could be enormous, far greater than a more typical valuation model. You have to consider general and annualized inflation scenarios, LTV, and square footage ROI by tenant type. You also must think about numerous kinds of real-time data, including analogous property sales figures, hyper-local trends, and vacancy rates. There may even be a need to factor in Internet of Things data streaming from sensors to provide insights into electricity consumption, radical temperature/humidity changes, and other variables associated to commercial and residential housing trends.

It’s also important to note that, unlike conventional CRE deals, this one has macro-economic implications that will affect not just the Queensborough neighborhood or NYC, but the entire state of New York, and probably the entire Northeast corridor. So a host of economic factors may have to be incorporated into the analysis.


Collaboration

There are a number of stakeholders on any CRE deal, so naturally Sunnyside is going to amplify that by orders of magnitude. The analytics of this project could involve close coordination with various government officials and departments; numerous investors; developers; Amtrak, the MTA, and other rail operators; and several teams of technical consultants, just to name a few. When you’ve got this many cooks in the kitchen, the ability to share data with full version control becomes tantamount to its evaluation and sustainability long term.

In short, there needs to be a single repository of information accuracy, something which can only be achieved in the cloud. If the software being used resides on someone’s desktop or even laptop, there’s going to be version control oversight that cannot scale over the long run.


Integration with a wide range of business applications

With so many organizations involved, there will also likely be a need to integrate with numerous other cloud-based software systems to track the inflow and outpouring of financial and demographic data that might influence calculations. There may be the need to leverage APIs to integrate with applications from numerous offices and organizations for accounting, ERP, property management, construction management, and asset management. In other words, the data that informs this analysis can’t reside in silos. It’s the kind of data that all of the organizations working on defining and building Sunnyside Yards are capturing and putting to use in other applications.

On a related note, this also means that the sheer volume of data that will have to be managed will be much greater than the data for your average CRE valuation, at “big data” scale.


Compliance

As sure as the sun rises, you can bet that a project of this size is going to be put under a microscope by every relevant regulatory agency in the U.S. In fact, new regulations from Freddie Mac, Fannie Mae, and Sarbanes Oxley Compliance (SOCs) will make the need to make financial and demographic data trackable in order to analyze every material change to the underwriting and valuation process. So, a tightly controlled process which allows Sunnyside Yard’s stakeholders to provide full transparency to all the necessary oversight bodies is imperative. Being able to trace everything that has happened along the way and attribute it to a specific calculation and vendor assumption will be vital to this process. Any vendor working on Sunnyside Yards will need the ability to track and manage every change: see who opened which set of information, how often they accessed the information, who they have shared it with, and what changes were made.

In summary, performing the analyses on a project the scope of Sunnyside Yards is going to require computing power that fully leverages the capabilities afforded by the latest cloud and big data analytics technologies. Spreadsheets and software that’s tied to one computer and internal servers just won’t cut it… it’ll take the next generation of CRE technology.

Min Suh Joins Panel on Real Estate Data Challenges and New Horizons at CFO/COO FORUM

WHAT:  Min Suh, Founder and CEO of Assess+RE (www.assessre.com), a leading cloud-based provider of financial underwriting and analysis software for commercial real estate (CRE), will participate today in a panel discussing data challenges and trends at this year’s 6th Annual Real Estate CFO & COO Forum (West).

The session, titled “Ending Reconciliation: Data Challenges, Opportunities & New Horizons”, explores the latest innovations to drive back office efficiency and transparent communications in real estate. The panel is moderated by Ray Haarstick, CEO, Relevant Equity Systems, Inc.

WHY:
The CRE industry has lagged in embracing technological innovation, and still struggles with basics like accessing research data, financial reporting, and transaction workflow tools. As dynamic companies embrace the flexibility and collaborative benefits of the cloud, CRE tech remains decidedly on-premise. Fortunately, there’s widespread agreement that the industry is ripe for disruption, and Suh will provide visionary insight into what is happening, and what needs to happen for CRE firms to compete in a new landscape.

WHEN:  Thursday, May 10, 2018, 2:35 P.M. PT

WHERE: The 6th Annual Real Estate CFO & COO Forum takes place May 10-11 in San Diego, and features top thinkers in Commercial Real Estate (CRE).

ABOUT MIN SUH: Min Suh is the CEO and Founder of Assess+RE, a cloud-based financial computation and underwriting analysis SaaS platform. A former CRE investment professional with Louis Dreyfus, Suh spent 7 years as a finance professor at Columbia University’s Masters in Real Estate Finance Program. Suh’s previous experience in CRE includes having worked for a $2B private family office in Manhattan underwriting, valuation and investment oversight.

Assess+RE (www.assessre.com) is creating the next generation of cloud-based software for underwriting and valuation analysis within the Commercial Real Estate (CRE) market. Assess+RE seamlessly integrates property level assumptions for single assets or portfolios with 3rd party CRE data to provide a faster, more transparent, and easier way to analyze commercial real estate transactions. Built by industry domain experts and subject experts from Columbia University’s real estate finance program, the Assess+RE platform provides user-friendly dashboards and reports for both equity and debt analysis which can be exported and shared with everyone in the CRE transaction value chain. Assess+RE provides the highest levels of data security and is accessible through any standard web browser, tablet, or mobile smartphone. Assess+RE is headquartered in NYC, with regional offices in San Francisco and Los Angeles.

CRE: An Industry That’s Primed for Disruption

It’s no secret that the commercial real estate (CRE) industry has lagged in embracing technological innovation, and still struggles with basics like accessing research data, financial reporting, and transaction workflow tools. As Rick Sharga of Ten-X noted to BisNow, “Transaction-oriented aspects of the business are still overwhelmingly handled in-person or through paper trails, as was done traditionally.” Most notably, in an era where the most dynamic companies are embracing the flexibility and collaborative benefits of the cloud, CRE tech remains decidedly on-premise.

This is untenable for a number of reasons, not the least of which is that decisions are currently based on a process that’s error-prone and, due to the siloed nature of information and absence of collaboration, lacks the critical perspective and insight of all the necessary parties. Furthermore, upcoming regulations from Freddie Mac, Fannie Mae and Sarbanes-Oxley Compliance (SOCs) will make current systems even more obsolete by requiring the ability to track and analyze every material change to the underwriting and valuation process.

Clearly, the industry can’t carry on in this fashion, but in order to address the problem, you first have to understand why it exists in the first place. What is it about this industry that makes it averse to tech change?

Why does the CRE industry lag in tech adoption?

Researchers Michael Berman, Barry Libert, Megan Beck and Jerry (Yoram) Wind looked at this phenomenon and provided a few answers for Wharton School of Business. For starters, they say, real estate is somewhat unique in having created about $50 trillion in wealth, roughly half of which is commercial real estate, with minimal reliance on technology. Sharga correctly observes that, “The more successful they’ve been at doing things a certain way, the more reluctant they are to change.” This sentiment was echoed by security tech expert Arvind Sathyamoorthy, who noted a challenge of adoption: “Since things are already working, why change, and more importantly why spend money to change.” He points to “skepticism on the efficiencies that could be gained” and a natural inclination to spend money on proven practices or concrete assets.

The industry, according to Berman, et al., is grounded in concepts dating back to the 19th century, such as the emphasis placed on location, and the assumption that growing the business means acquiring hard assets, one at a time. These, they say, have “hard-wired” CRE veterans in a certain direction. The authors point out that “the financial statements of most firms do not even count data and networking as assets”. But Berman and his co-authors emphatically assert the need for change, and for the industry’s incumbents to “pivot their strategy and leadership today or lose value to nimbler, technology-first firms”.  A new type of leverage, they say, will emerge based on intangible assets, which I would describe in general terms as CRE data (about the tenants, properties, locations/geographies, trends, etc.). CRE industry leaders, they say, must shift their mental and business models to “put digital at the center of everything they do.”

The current state of affairs

For a transaction to occur, the numerous participants in the value chain must understand the associated risks, but currently most of the software and information resources which offer calculation capabilities and data analysis are siloed and mutually exclusive. The CRE industry typically uses on-premise software like ARGUS or Excel to construct financial models for buying, managing, selling, and valuing properties–solutions that require a lot of training, are costly to maintain, and further contribute to siloed decision-making. It’s also important to note that, as is the case with a lot of on-premise software, they’re mostly the domain of large firms–small firms and individual investors can’t afford them, and are almost entirely left out of the tech loop when it comes to valuation and analyses.

Even companies with the resources to leverage these technologies suffer from numerous inefficiencies, and lack a cohesive, centralized way to underwrite commercial real estate purchases. This drives up the cost of analysis, with an average model audit taking 195 minutes and the lack of ability of stakeholders to check models producing a high number of errors (in no small part due to version control issues).

Ripe for disruption

This can’t go on–the industry needs cloud-based solutions that offer repeatable processes that mirror the simplicity of CRM and marketing automation platforms. Fortunately, there’s widespread agreement that the CRE industry is ripe for disruption. Real estate attorney Andrew J. Giorgiann points out that “This new focus on analytical data has fueled the rapid creation and adoption of new tools and processes that will help today’s commercial owners, brokers and occupiers tackle the modern challenges of sales, leasing and asset management” adding that “Gone are the days of the old guard hoarding information based on who knows who in a particular CRE space.”

With all this in mind, we believe that the Assess+RE platform plays a pivotal role in this great, industry-disrupting transition, taking a huge step in the journey toward what Giorgiann predicted will be “a new level of clarity in transactions”. We’re offering financial analysis where assumptions and outcomes are combined with statistical analysis in the cloud to deliver true and complete business intelligence to end users. Additionally, we’re opening up the playing field to all of those small firms and individual investors that have, until now, been left out in the cold when it comes to effective CRE technology.  

I predict that within the next several years, the CRE industry will see an explosion of new cloud-based technologies, like Assess+RE, that feature an intuitive, automated experience, and streamline the time, cost and resources associated with real estate investments. These are exciting times indeed!

Financing: Uses of Funds

The Problem

Every loan has the potential to be a little different, with a broad range of types, constraints, and parameters. These granular details matter but can be difficult to track and use effectively with simpler modeling methods and make software feature sets complicated to deliver.  When our product team scoped our financing engine, we came up with over seven methods that lenders use to model a Use of Funds.

Our Solution

Assess is equipped with a versatile financing interface that gives you control in inputting your loans parameters and specifying how it will be used, or its “Uses of Funds.” Will the loan be used to fund any shortfalls in the property’s cash flows? Financing fees? Assess makes it simple under a broad range of scenarios and uses the most conservative Use of Funds sizing approach, from a bank’s perspective.

Uses of Funds are critical because they correlate directly with the size of a loan’s total principal. For instance, if a lender is sizing a loan using the Loan to Cost (LTC) method, selecting more use categories might increase total costs, which in turn increases the required principal amount.

In Assess, you can set Uses of Funds in the Financing section with a series of toggle switches and specify how long you want the loan to fund these uses in the Duration field.

These flexible financing options let you easily input a wide array of loans that cover various project scenarios in a intuitive way.

Thanks!

Come see this feature in action at www.assessre.com. We’re excited for you to take a look and to hear your feedback. Sign up for our newsletter to stay up-to-date with our latest feature developments.

Feature Highlight: Tenancy Losses

The Problem

Current real estate financial models today have poorly understood “conventional” approaches to vacancy or credit loss adjustments. A common approach is to apply a discount of some constant percentage, regardless of the property’s occupancy; however, this approach could result in inaccurate or unintended adjustments.

Our Solution

Assess tackles inaccuracies of this common industry practice by allowing three options for both General Vacancy and Credit loss adjustments, all of which are accessed in the Tenancy Losses section of the General Assumptions page.

  1. “All Tenant Income”: This is the most common and simplest option. It reduces all scheduled income by a fixed percentage. For example, if a property has $1,000,000 of projected rental income and general vacancy of 10%, then Assess subtracts $100,000 of vacancy.
  1. “All Market Income”: This option works in the same way as “All Tenant Income,” but only reduces income scheduled from “Market” tenants (i.e. not “In-Contract”).
  1. “Dynamic Loss”: This option adjusts the vacancy deduction based on the percentage of rental income designated as “Contract” versus “Market.” Dynamic Loss selects the lesser of the actual percentage of the property’s income that is designated as “Market” and the specified “Dynamic Loss %.”

For example, a property’s Dynamic Loss percentage is designated as 5%, and its rental income is comprised of 90% Contract income and 10% Market income. Dynamic Loss uses the lesser of 10% and 5% to calculate a vacancy deduction – in this case, 5%. If this same property’s rental income is 98% Contract / 2% Market, then Dynamic Loss uses the lesser of 2% and 5% -in this case, 2%.

See how Assess handles vacancy or credit loss adjustments!

We’re excited for you to take a look by signing up and hearing your feedback. Sign up for our newsletter and follow us on Twitter @assessre to stay up-to-date with our latest feature developments.

Feature Highlight: Financing – Permanent Loan

The Problem 

Upon completion of underwriting a deal’s operational aspects, most investors will want to add financing to their investment to maximize returns. This can be complicated due to varying loan parameters and structures, but Assess makes it simple.

Our Solution

A permanent loan – a long term loan (10+ years) used to finance your property – is one of the primary types of financing that you can incorporate into your Assess models. A permanent loan commonly pays off a previous, outstanding long term or short term loan (e.g. a bridge, construction, or permanent loan).

Assess gives you a multitude of input options, including the ability to enter any number of loans in succession. This allows you to cover bridge to perm financing scenarios, refinance scenarios, and any other scenario requiring multiple successive loans.

To enter a permanent loan, add a new loan and select the Permanent button under “Type.” Contextual uses, sizing, and repayment input options will then appear for the new loan.

Inputting loan details

These intuitive input choices, including more specific options such as held back funding and debt yield loan sizing, support the precise modeling of a wide variety of loan types. To take a deeper dive into Assess financing features, visit our knowledge base.

See Permanent Loans in Action!

We’re excited for you to take a look by signing up and hearing your feedback. Sign up for our newsletter and follow us on Twitter @assessre to stay up-to-date with our latest feature developments.

Easy Imports from Argus DCF

Argus is counting down the days until it stops supporting Argus DCF, but Assess+RE has been busy building tools for the future.  A couple of weeks ago, we were excited to announce the launch of deal sharing, and today we introduce Argus DCF imports!

Our Argus DCF Import tool is designed to make the move to Assess as simple as possible.  With a simple drag and drop, you can now import existing property data into new projects on Assess.  All of the most time consuming inputs, including operating expenses, rent roll, acquisition and sale, address, rentable area, inflation, and vacancy losses, are automatically populated in your new Asses properties.  We’ve written easy guides for both how to export your projects from DCF and how to import those projects into Assess.  Each step takes only a few minutes, and allows you to migrate your business as quickly as possible.

Three easy steps:

  1. Prepare your Argus DCF files for Assess
  2. Import existing properties into Assess
  3. Update remaining assumptions and optional details, such as reimbursements and financing
  4. Reach out to Assess with any questions or to let us know what you think!

If you have an account, log in now and try it for yourself. If not, start a free trial today and check out how easy it is to make the move from Argus DCF. We can’t wait to welcome you to Assess+RE and show you how much time and money you can save doing your deals with us.

As always, we’d love to hear what you think – get in touch through the in-app chat or drop us a message at hello@assessre.com.

 

Deal Sharing: Collaboration that works for you

Today we’d like to announce the launch of a major feature on the Assess+RE platform: Deal Sharing.

Deal Sharing Tab

You asked for it, we built it

Following our launch we heard many new feature requests, but one was the most requested by far: deal sharing. Every modern deal involves the participation of investors, lenders, brokers, appraisers, and entrepreneurs who need fast and simple communication, reliable data security, and tools that are available to anyone on any device. You told us that it was about more than sending data around – it’s the most powerful tool that you need to manage your business, your investment opportunities, and your communications.

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